Touchstone Exploration (LSE:TXP) became profitable at the Plc level last year in what the firm is calling a ‘transformational’ 12 months for its operations. The business, which dual-listed in June last year, generated free funds from operations of $3.1m during 2017. This figure is after all operational costs, taxes, royalties, and all Plc overheads had been deducted. Although this is a reduction on the $6.1m made the year before, that result was largely down to a hugely successful hedge Touchstone put in place as the oil price crashed. It made $6.5m on that finance deal, which had a material impact on that year’s profit. In terms of this year’s numbers, however, the operational progress the company has made is clear to see.
2017’s strong financial performance was supported by a jump in crude oil production, which hit 1,375 barrels per day, up 6pc from 2016’s annual average production of 1,301 barrels a day. This was driven by a $9.4m exploration and development program to drill four successful wells and perform 20 recompletions. With Touchstone currently carrying out a ten-well drilling programme, this figure puts the firm well on track to meeting its near-term production goal of 2,000 barrels a day.
The price of Brent also helped. Over the course of 2017 Touchstone was able to sell its oil at an average price of $63.79/brl, up from $50.49/brl the year before. With Brent continuing to perform strongly into this year, this is an encouraging sign for the company’s future prospects.
Although Touchstone recorded a net loss of $947,000 over the year, after cap-ex, this was a major improvement on the $12.9m net loss it recorded in 2016. Indeed by the end of the year, the company had a strong cash balance of $13.9m, including a working capital surplus of $6.8m, and reduced net debt by 42pc over the year to $8.2m. Touchstone is fully funded for the remainder of the ten-well drill campaign, and if it hits its targets, there might even be scope for it to extend this using internally generated funds.
Shareholders will know that that the firm can further grow its petroleum revenues, which jumped by a third in 2017 to $32m, up from $24m in 2016. With a fair wind behind it (assuming it hits its production targets, keeps costs at similar levels and oil prices remain broadly where they are), by the end of this year Touchstone could be throwing off in excess of $1million free cash flow a month.
One additional point worth noting about Touchstone’s results today concerns its plans at its East Brighton Exploration property. Here the company was able to reduce it’s $6m letter of credit related to the license to $2.15m and secured a financing facility to support the full amount.
The original terms of the East Brighton deal mean that Touchstone has committed to drilling one well to secure its stake. This well was anticipated to be an offshore well, which would have been much more expensive to drill than an onshore one.
However, following reinterpretation of the available 3D-Seismic, Touchstone’s engineers have identified an onshore site within the East Brighton licence area, which can then be drilled horizontally to hit the primary target. Obviously, the cost of drilling the onshore horizontal well is much lower than the cost of drilling an offshore well.
This innovative solution was accepted and has freed up Touchstone’s working capital, meaning the company can fulfill its obligations at East Brighton, while freeing up working capital to deploy across the rest of its portfolio.
A Transformational year on course to be beaten?
Commenting on today’s RNS Paul Baay, president and chief executive of Touchstone, said:
“This year has been transformational for Touchstone based on our successful listing on the London AIM market in June 2017 and the completion of a fundraising in December to finance our 2018 ten well drilling campaign. This program combined with an encouraging set of 2017 drilling results, has placed the company in an excellent position to achieve our near-term production target of 2,000 barrels per day, as current production is 1,654 barrels per day.”
‘The company is in a healthy financial position, increasing cash and reducing net debt during 2017. We look forward to updating the market in due course as we build upon the strong platform that we established over the past year.’
Since the end of 2017, Touchstone has delivered further positive news flow to investors. Earlier this month, in its operational update for January and February, the firm revealed it is well on its way to meeting its profitable production target of 1,800bopd, with production of 1,521bopd in January and 1552bopd in February. The company also recently revealed a 20pc jump in total proved reserves across its assets in the Republic of Trinidad and Tobago.
Perhaps most excitingly Touchstone has brought into production the first well of its accelerated 10-well drill programme for 2018 and has secured a second rig for drilling. With the results of nine wells still to come the company could find itself within touching distance of being fully profitable within the coming months. If it pushes on to hit its 2,000bopd target by late summer, this leaves scope for further drilling. By the year-end it is entirely possible the company could be generating in excess of $1million in free cash each month, meaning it would be able to fund future growth using internal funds. With a current market cap of £16million, the fundamental case for this company seems to strengthen with every passing announcement.